Pariwartan: A parking lot for stressed power assets that have no takers

Starting this week, as many as 34 stressed power projects, with a cumulative capacity of 40,000 Mw, were expected to line up at the insolvency courts. The 180-day deadline set under the February 12 circular of the Reserve Bank of India (RBI) is over. But a Supreme Court directive on Tuesday halted the insolvency process for the sector until November, thereby making the situation more precarious.

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According to the circular, under the Insolvency and Bankruptcy Code (IBC), even a one-day payment failure was to be regarded as a default, against which insolvency proceedings were to be initiated. The RBI had allowed 180 days for the resolution process, after which the asset would have to be submitted to the National Company Law Tribunal (NCLT) for insolvency proceedings.

During these six months, the government devised schemes to resolve the stress built up over decades. One such was the Power Asset Revival Focused Warehousing & Revitalisation (Pariwartan) framework by Rural Electrification Corporation (REC). The scheme is envisaged to be a parking spot for stressed assets that do not find any takers. REC, along with key sector lenders, would manage them along with an operations and management partner, most likely NTPC — another state-owned company — and sell them later.

The idea sounds promising, except that neither any other lender nor RBI approved it, even as the clock on the 180-day deadline kept ticking. With the SC halting insolvency proceedings, REC gets more time to revive assets outside NCLT. REC is now also planning to register this ‘asset restructuring company’ (ARC) with the RBI and use the same framework for assets that land in NCLT now. But to get equity partners for the ARC and RBI approval is another time-taking process.

The idea though still sounds great. The assets that land in NCLT usually have two options — sale through bidding mode or a one-time settlement offer by the original promoter. As far as power assets are concerned, the case is more twisted. There are hardly any buyers.

Those who were wondering whether 40,000 Mw would go off the grid weren’t operating at optimal level in the first place. To put the facts in place, against an installed capacity of 300,000 Mw, current supply stands at 175,000 Mw.

So, why a warehouse?

REC claims that with a Pariwartan framework, these assets are safe in a warehouse where revival is possible and also the likelihood of finding a buyer in near future. But any ARC needs initial funding which the other banks have not yet agreed to. As a sector lender, REC is confident it can manage power assets. The banks, however, are not so sure. REC claims that the ARC will manage the assets that do not find any takers in the market. But the ARC itself has not gathered any equity or regulatory support yet.

Decades of policy mismatch and delayed payments have pushed banks to their brink. At times, coal supply will fail, at other times state-owned power distribution companies will not buy power or will not pay. Coal block allocation was cancelled in 2014, power demand growth is at a sub-optimal level of six per cent, and the same issues of coal supply exist. Citing their exposure to the thermal power sector, banks have refused to even fund the emission control retrofit at coal-based power units.

In such a scenario, it would be extremely difficult to get banks on board for Pariwartan. The sector is expecting a 50-60 per cent haircut by the banks during the resolution process of these stressed assets. Apart from this, banks are wary of any financial exposure to the power sector now.

REC has almost nil exposure to the thermal power sector and Pariwartan would indeed have been a good scheme, only if it came sooner. RBI, in its several representations, has said the stress in the power sector is a fundamental issue and not a commercial one. “It can hardly be stated that the deep-seated problems of the power sector are 'temporary phenomena', which therefore require only a short-term 'moratorium' from prudential norms… The problems are likely to take long to resolve and the financial sector cannot ignore the stress on its books, in the interim," RBI said in its submission to the ministry of finance in July.

The real Pariwartan (change) should be in the supply chain of the power sector with conducive policies and stringent legal and financial perimeters. A warehouse would again dodge the problem, not solve it.